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Feb 2nd 2013 |From the print edition
THIRTY YEARS AGO Margaret Thatcher turned Britain into the world s leading
centre of thinking the unthinkable . Today that distinction has passed to
Sweden. The streets of Stockholm are awash with the blood of sacred cows. The
think-tanks are brimful of new ideas. The erstwhile champion of the third way
is now pursuing a far more interesting brand of politics.
Sweden has reduced public spending as a proportion of GDP from 67% in 1993 to
49% today. It could soon have a smaller state than Britain. It has also cut the
top marginal tax rate by 27 percentage points since 1983, to 57%, and scrapped
a mare s nest of taxes on property, gifts, wealth and inheritance. This year it
is cutting the corporate-tax rate from 26.3% to 22%.
Sweden has also donned the golden straitjacket of fiscal orthodoxy with its
pledge to produce a fiscal surplus over the economic cycle. Its public debt
fell from 70% of GDP in 1993 to 37% in 2010, and its budget moved from an 11%
deficit to a surplus of 0.3% over the same period. This allowed a country with
a small, open economy to recover quickly from the financial storm of 2007-08.
Sweden has also put its pension system on a sound foundation, replacing a
defined-benefit system with a defined-contribution one and making automatic
adjustments for longer life expectancy.
Most daringly, it has introduced a universal system of school vouchers and
invited private schools to compete with public ones. Private companies also vie
with each other to provide state-funded health services and care for the
elderly. Anders Aslund, a Swedish economist who lives in America, hopes that
Sweden is pioneering a new conservative model ; Brian Palmer, an American
anthropologist who lives in Sweden, worries that it is turning into the United
States of Swedeamerica .
There can be no doubt that Sweden s quiet revolution has brought about a
dramatic change in its economic performance. The two decades from 1970 were a
period of decline: the country was demoted from being the world s
fourth-richest in 1970 to 14th-richest in 1993, when the average Swede was
poorer than the average Briton or Italian. The two decades from 1990 were a
period of recovery: GDP growth between 1993 and 2010 averaged 2.7% a year and
productivity 2.1% a year, compared with 1.9% and 1% respectively for the main
15 EU countries.
For most of the 20th century Sweden prided itself on offering what Marquis
Childs called, in his 1936 book of that title, a Middle Way between
capitalism and socialism. Global companies such as Volvo and Ericsson generated
wealth while enlightened bureaucrats built the Folkhemmet or People s Home .
As the decades rolled by, the middle way veered left. The government kept
growing: public spending as a share of GDP nearly doubled from 1960 to 1980 and
peaked at 67% in 1993. Taxes kept rising. The Social Democrats (who ruled
Sweden for 44 uninterrupted years from 1932 to 1976 and for 21 out of the 24
years from 1982 to 2006) kept squeezing business. The era of neo-capitalism is
drawing to an end, said Olof Palme, the party s leader, in 1974. It is some
kind of socialism that is the key to the future.
The other Nordic countries have been moving in the same direction, if more
slowly. Denmark has one of the most liberal labour markets in Europe. It also
allows parents to send children to private schools at public expense and make
up the difference in cost with their own money. Finland is harnessing the
skills of venture capitalists and angel investors to promote innovation and
entrepreneurship. Oil-rich Norway is a partial exception to this pattern, but
even there the government is preparing for its post-oil future.
This is not to say that the Nordics are shredding their old model. They
continue to pride themselves on the generosity of their welfare states. About
30% of their labour force works in the public sector, twice the average in the
Organisation for Economic Development and Co-operation, a rich-country
think-tank. They continue to believe in combining open economies with public
investment in human capital. But the new Nordic model begins with the
individual rather than the state. It begins with fiscal responsibility rather
than pump-priming: all four Nordic countries have AAA ratings and debt loads
significantly below the euro-zone average. It begins with choice and
competition rather than paternalism and planning. The economic-freedom index of
the Fraser Institute, a Canadian think-tank, shows Sweden and Finland catching
up with the United States (see chart). The leftward lurch has been reversed:
rather than extending the state into the market, the Nordics are extending the
market into the state.
Why are the Nordic countries doing this? The obvious answer is that they have
reached the limits of big government. The welfare state we have is excellent
in most ways, says Gunnar Viby Mogensen, a Danish historian. We only have
this little problem. We can t afford it. The economic storms that shook all
the Nordic countries in the early 1990s provided a foretaste of what would
happen if they failed to get their affairs in order.
There are two less obvious reasons. The old Nordic model depended on the
ability of a cadre of big companies to generate enough money to support the
state, but these companies are being slimmed by global competition. The old
model also depended on people s willingness to accept direction from above, but
Nordic populations are becoming more demanding.
Small is powerful
The Nordic countries have a collective population of only 26m. Finland is the
only one of them that is a member of both the European Union and the euro area.
Sweden is in the EU but outside the euro and has a freely floating currency.
Denmark, too, is in the EU and outside the euro area but pegs its currency to
the euro. Norway has remained outside the EU.
But there are compelling reasons for paying attention to these small countries
on the edge of Europe. The first is that they have reached the future first.
They are grappling with problems that other countries too will have to deal
with in due course, such as what to do when you reach the limits of big
government and how to organise society when almost all women work. And the
Nordics are coming up with highly innovative solutions that reject the tired
orthodoxies of left and right.
The second reason to pay attention is that the new Nordic model is proving
strikingly successful. The Nordics dominate indices of competitiveness as well
as of well-being. Their high scores in both types of league table mark a big
change since the 1980s when welfare took precedence over competitiveness.
Explore our interactive guide to Europe's troubled economies
The Nordics do particularly well in two areas where competitiveness and welfare
can reinforce each other most powerfully: innovation and social inclusion. BCG,
as the Boston Consulting Group calls itself, gives all of them high scores on
its e-intensity index, which measures the internet s impact on business and
society. Booz & Company, another consultancy, points out that big companies
often test-market new products on Nordic consumers because of their willingness
to try new things. The Nordic countries led the world in introducing the mobile
network in the 1980s and the GSM standard in the 1990s. Today they are ahead in
the transition to both e-government and the cashless economy. Locals boast that
they pay their taxes by SMS. This correspondent gave up changing sterling into
local currencies because everything from taxi rides to cups of coffee can be
paid for by card.
The Nordics also have a strong record of drawing on the talents of their entire
populations, with the possible exception of their immigrants. They have the
world s highest rates of social mobility: in a comparison of social mobility in
eight advanced countries by Jo Blanden, Paul Gregg and Stephen Machin, of the
London School of Economics, they occupied the first four places. America and
Britain came last. The Nordics also have exceptionally high rates of female
labour-force participation: in Denmark not far off as many women go out to work
(72%) as men (79%).
Flies in the ointment
This special report will examine the way the Nordic governments are updating
their version of capitalism to deal with a more difficult world. It will note
that in doing so they have unleashed a huge amount of creativity and become
world leaders in reform. Nordic entrepreneurs are feeling their oats in a way
not seen since the early 20th century. Nordic writers and artists and indeed
Nordic chefs and game designers are enjoying a creative renaissance.
The report will also add caveats. The growing diversity of Nordic societies is
generating social tensions, most horrifically in Norway, where Anders Breivik
killed 77 people in a racially motivated attack in 2011, but also on a more
mundane level every day. Sweden is finding it particularly hard to integrate
its large population of refugees.
The Nordic model is still a work in progress. The three forces that have
obliged the Nordic countries to revamp it limited resources, rampant
globalisation and growing diversity are gathering momentum. The Nordics will
have to continue to upgrade their model, but they will also have to fight to
retain what makes it distinctive. Lant Pritchett and Michael Woolcock, of the
World Bank, have coined the term getting to Denmark to describe successful
modernisation. This report will suggest that the trick is not just to get to
Denmark; it is to stay there.
The final caveat is about learning from the Nordic example, which other
countries are rightly trying to do. Britain, for example, is introducing
Swedish-style free schools . But transferring such lessons is fraught with
problems. The Nordics success depends on their long tradition of good
government, which emphasises not only honesty and transparency but also
consensus and compromise. Learning from Denmark may be as difficult as staying
there.